Allowable Business Expenses

Expenses are only deducted when the client has chosen to use actual verified expenses (not the 40% deduction). To determine the amount of net nonexempt earned income, deduct business expenses which are directly related to the production of goods or services (without which the goods or services could not be produced) from the monthly income.

If the income is received less often than monthly, expenses will be verified from a “previous period” and a “good faith” estimate for the current period will be based on the previous month’s income and expenses.

Business expenses include:

Monies used to purchase nondurable goods. (Examples: stock, raw materials, seed and fertilizer, etc.)
The interest and taxes paid on an installment contract for purchase of income producing property
The interest paid on installment plan for purchase of capital assets, equipment, machinery, and other durable goods
Cost of labor (except own salary).

Cost of Employees

If the self-employed person has employees, then the mandatory expenses paid for those employees are an allowable expense.

A deduction from gross self-employment income is allowed for the following:

Federal and State income taxes owed for employees. The actual amount paid is deductible as a mandatory business expense. Taxes are paid quarterly on the calendar quarter.
Social Security paid for employees. A deduction is allowed for the amount actually paid
State Disability Insurance paid for employees. A deduction is allowed for the paid amount.
- Note: The payroll taxes on an employee's wages may be allowed as a deduction as paid. There must be verification and documentation that the tax liability has been met.
Union Dues/Association Fees. When membership in a labor union or association is a REQUIREMENT for self-employment, the actual cost is allowed as a business expense.

Licenses

The cost of all licenses required for business operation is allowed as a deduction.

Advertising

The cost of business advertising is allowed as a deduction.

Bonds

The cost of providing business-related surety and performance bonds is allowed as a deduction. These are generally bonds to ensure performance of the self-employed person.

Expendable Supplies

Expendable supplies are those which are commonly used quickly or are only used for a short time.

These include items such as:

Office supplies (pens, typewriter ribbons, notepads and stationery, paper clips, etc.)
Price tags, posters for special sales (as opposed to permanent signs), pins, tacks, etc.
Scouring powder, etc.
Grease and lubricants used by a mechanic (but not gas, oil, filters, bought for resale to clients).
Leather softeners used in leather craft.
Bottled gas used in welding or jewelry making, etc.

The full cost of business-related expendable supplies is allowed as a deduction.

Capital Assets

The purchase price (or principal payment/s) on business related capital assets is NOT allowed as a deduction, but sales tax, interest or finance charges are. Capital assets are items ordinarily having a long life and not requiring frequent replacement. This includes items such as:

Office equipment (adding machines, typewriters, staplers)
Furniture and furnishings (drapes, chairs, sofas, desks, counters, lighting fixtures, decorations)
Major equipment and machinery (plows, freezers, tractors, air conditioners, motor vehicles), etc.

If a capital asset item is commonly used for both business and nonbusiness purposes (for example, an automobile), the household must provide adequate information to determine what portion of the expense is allowable to the business.

Maintenance and Repairs

The cost of business-related maintenance and repairs are allowed as a deduction. Some examples include:

Janitorial supplies
Janitorial services, mechanical repairs of equipment, periodic servicing of machinery, etc.

Taxes

The actual amount of all business-related taxes are allowed. This includes (but is not limited to):

Sales taxes
Property taxes, etc.
Those taxes collected from clients (federal excise tax, sales tax) and forwarded to governmental agencies.

Insurance

The cost of insuring business property is allowed as a deduction. This includes insurance for:

Fire
Theft
Public liability
Workman's Compensation.

Transportation

The client is allowed the expense of operating motor vehicles for business related transportation (not including transportation to and from work).

This deduction is the greater of:

A standard mileage rate developed by the county (i.e., fifteen cents per mile), or
Actual VERIFIED costs, including fuel, maintenance repairs, and finance or interest charges, but NOT including principal payments (receipts must be provided and amounts justified as business expense).

Legal or Professional Services

The actual cost of business-related legal or professional services is allowed as a deduction. Examples include:

Attorney's fees
Tax preparation or consultant fees, etc.

Merchandise, Stock or Raw Materials

The cost of merchandise, stock, or raw materials, plus interest or finance charges (if any), will be allowed as a deduction. Examples include:

Seeds used to produce crops for sale
Any materials used to produce a product for sale
Any items bought for resale (including items resold incidental to the performance of a service, such as spark plugs bought by a mechanic and sold to the client, with a concurrent charge for installation).

Rent or Lease Expenses

The cost of renting or leasing land, office, shop or warehouse space, equipment, automobiles/trucks, furniture, etc., used exclusively for the business is allowed.

The lease, rental agreement or mortgage payment must be reviewed.

In order for this expense to be allowed the space must have been initially rented or purchased for the business.

A room in the recipient's home is not allowed unless specifically built or purchased for the business.

Note: If the recipient has rented a home or apartment which has extra space SPECIFICALLY INTENDED to be used for their self-employment, a prorated share of the rent may be an allowable deduction.